Private equity firms have seen their total assets under management grow to $2.8 trillion, with buyouts the biggest share at $1.6 trillion. Demand for the asset class continues to be strong on the back of strong performances in the long-term and interest from big capital, from pension funds to sovereign wealth funds.

Private equity firms have enjoyed strong growth in assets under management in recent years. Last year, assets hit a record $2.5 trillion, while investors continued to enjoy strong returns on their investment.The industry is seeing increasingly larger numbers of active PE firms, while investors are becoming increasingly active themselves in the investment process. The changing dynamic within the industry creates opportunities and challenges for investors and PE firms alike.

This year, growth in the private equity market continued, as pension funds and sovereign wealth institutions concentrate on diversifying their holdings in particular. The long-term trend, over a 20-year period, shows PE firms beating the equity market by a solid margin, according to new research from McKinsey & Company.

Assets saw considerable increases on the levels seen last year, with equity, in particular, continuing its bull-run. The S&P 500 was up more than 20% for the year. Investment in more alternative asset classes likewise displayed positive results.

Pension funds have become a major investor in the segment, on the back of increasingly fraught conditions for funds, as liabilities increasingly diverge from assets. In the US for instance, the gap between liabilities and assets has grown to $3.8 trillion, even during a period of strong equity growth. The segment has been plagued by risk aversion to equities, changes to demographics (people are living longer) and an ageing population. Sovereign wealth funds have also upped interest in PE funding, although the report notes that they tend to take a more active role in their position as limited partner regarding the kinds of assets acquired by the funds.

The total market size for private equity topped $2.8 trillion in 2017, with buyouts being the most significant segment at around $1.6 trillion. The acquisition of businesses had the highest total invested value in the US at almost $1 trillion, while Europe saw around $500 million in invested capital. Asia and the rest of the world remain less well invested, at around $150 billion and $50 billion respectively.

Venture capital

Venture capital also saw strong funding performances, with more than $300 million in the US, with Asia seeing around $190 billion in the segment. Other assets, such as real estate and private debt have around $810 billion and $637 billion in invested assets, respectively as of the end of 2017.

The mega-buyout market continued to have a disproportionate impact on the wider market, with around 15% of total invested value, a 78.3% CAGR between 2012-17. Other private equity fundraising represents around 61% of the total market, with growth for the segment at 14.2% between 2012-17.

Investment continues to be influenced by LPs’ belief that private markets will post stronger returns on their capital than public ones. Large PE firms, those with more than $5 billion under management, have boasted strong performances over the past year.

Private market fundraising increased by 3.9% last year to $748 billion, largely on the back of a 11% increase in PE fundraising, as well as strong performances in private debt, up by 10%. Natural resources saw stiff declines, down around 6.5% or a total of $3.3 billion.

Overall, Europe saw the most significant increase in private market fundraising, at almost 11%, followed by the US at 3.4% increases in funds raised. Asia, meanwhile, saw a small decline of 2.8%, while the rest of the world saw more serious declines of 12.2%.